Cap charge for EM class drops

Standard & Poor's last week cut the capital charge applied to monoline insurers across the ratings board for emerging market future flow transactions. While the move is a positive for originators of future flows, it will doubtfully have much of an impact on monolines' appetite for that asset class, given the number of variables that go into demand, according to industry sources.

"What's changed is how we equate the risk of a transaction with how much a bond insurer sets aside," said Gabriel Wieder, an associate in S&P's emerging markets structured finance group.

The reduced capital charge came in the wake of the agency's introduction of transfer and convertibility assessments in November 2005, an update on the agency's view of the sovereign interference component of future flow transactions. This component factors in capital controls that would block debt payments, among other potential hazards of government intervention.

In gauging the correct capital charge level for a future flow deal, the agency traditionally added the risk of sovereign interference to either the survivability assessment in the case of financial originators or performance risk for exporters. With the ratings folding in an updated view of interference risk, the agency decided it could drop this component in assessing the capital charge, as it was already fully embedded in the rating. "The sovereign interference component that we used to assess had become redundant," Wieder said. With that component gone, the overall capital charge naturally shrank.

While one industry source said the move could nudge up the profitability of a monolines' outstanding future flows book, another said that wasn't necessarily the case. In addition, the charge assessed by Moody's Investors Service hadn't changed, sources said.

What is more, even with S&P's trimmed down capital charge, downgrade risk remains. This is especially compelling in the case of Turkish DPRs, lately the busiest future flow asset class, as S&P by and large rates the deals at the cusp of BBB-'. "Only one notch down and the charges [at monolines] go way up," one source said.